Printer Friendly

Private and non-profit firms need D&O coverage, too.

"We don't have any shareholders" is a common response from risk managers of private and non-profit organizations when they are asked about directors' and officers' liability insurance. However, a 1989 Wyatt Co. survey reveals that 48 percent of all D&O claims are brought by someone other than a shareholder, and 22 percent of those claims are employee-related suits. D&O suits can be brought by customers or beneficiaries of nonprofit organizations, as well as by competitors, government entities and community groups. Often the same set of circumstances results in suits from several groups. For example, an electric utility with a nuclear power plant program might be faced with a suit from its shareholders. In addition, customers, regulators, bondholders, lenders, employees and community action groups might also bring suits, basing their argument on the same facts.

Thus, every group with a stake in the affairs of a company or nonprofit organization feels increasingly at ease with filing suit against directors and officers. Yet defending against a D&O suit, no matter how groundless the charge, can be emotionally and financially draining for the whole organization. Indeed, most directors and officers find the process highly disruptive to their professional and personal lives.

D&O Duties

How can directors and officers incur personal liability? Regardless of whether the company is private or public, directors and officers are subject to three basic duties.

The duty of care is often referred to as the prudent person rule because directors and officers are expected to act with the care of a reasonably prudent person in a similar position under like circumstances. Directors and officers are expected to inform themselves prior to making a decision and to perform their duties in good faith and in a manner they believe to be in the best interest of the company or organization.

The duty of loyalty means that directors and officers may not use their position of trust and confidence to further their private interests. They must refrain from engaging in personal activities which would injure or take advantage of the company or organization. Last, the duty of obedience says that directors and officers must perform their duties within the terms of the corporate charter and in accordance with all applicable statutes and regulations.

With these duties in mind, directors and officers can incur personal liability in at least three ways. First, they can be held liable for their acts, errors and omissions. Second, they can incur personal liability simply through their status as a director or officer, such as when an officer is held responsible for the acts of a company employee. Finally, and most important, they can incur personal liability for legal fees and other expenses incurred in defending claims made against them, regardless of whether those claims have any merit or validity.

Non-Shareholder Suits

No longer are medical malpractice and product liability the only type of suits to win big awards. In 1989 two of the 10 highest dollar-figure jury awards to individual plaintiffs in tort cases were employee-related suits. In another recent case, Sims v. Kaneb Services Inc., the plaintiff was awarded $31 million in a Texas court. In Zalay v. John Hancock Mutual Life Insurance Co., the Florida court awarded $26 million. Some of these cases have been amended on appeal.

Employee suits against directors and officers have grown in recent years; therefore, they are a concern to all directors and officers. Employee-related suits may allege wrongful discharge or discrimination based on the sex, race or age of the employee. It was recently reported in Maryland that the Human Relations Commission charged Domino's Pizza Inc. with religious discrimination for refusing to hire a Sikh man whose religion requires him to wear a beard. Even if the claim is groundless, and is successfully defended in court, the defense cost for any employee-related suit can seriously affect the bottom line of any non-profit organization.

However, employee suits are not the only expensive third party suits that can be filed against directors and officers. Private corporations have to contend with claims from customers, creditors, competitors, regulatory agencies and the government. Non-profits have even greater exposures with the possibility of claims from members of the organization, donors and possibly beneficiaries.

Protecting the Gang

Risk managers often depend on indemnification clauses to protect directors and officers. Yet this could pose problems if the company or organization becomes insolvent or lacks sufficient resources to financially back the indemnification clause. This is especially true for non-profit organizations with limited resources. Also, certain acts, such as some securities law violations, may not be indemnifiable. There is also the risk that support has been lost among the board members or that a new board is unwilling to support previous directors and officers.

D&O insurance transfers the financial risk faced by all directors and officers for both private companies and non-profit organizations. Care should be taken to select an insurer that has proven underwriting and claims experience to protect against the loss of personal and corporate assets. Winona Newman, ARM, is branch manager of National Union Fire Insurance Co.'s financial services division in Tampa, FL.
COPYRIGHT 1991 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:directors' and officers' liability insurance
Author:Newman, Winona
Publication:Risk Management
Date:Feb 1, 1991
Previous Article:Making the M&A transition with D&O run-off coverage.
Next Article:Should parents consolidate new units' products coverage?

Related Articles
Understanding insurance.
Directors/officers liability insurance critical.
Staff coverage under D & O.
A quick overview of what you need to know about your directors and officers policy.
D&O Liability: The Battle for the Middle Market.
Protect yourself: one should not ignore potential directors' and officers' liability.
Study: D&O rates fall again.
Bridging D&O gaps.

Terms of use | Copyright © 2016 Farlex, Inc. | Feedback | For webmasters